Tax collection key to development, say MPs

23 August 2012

A report published today by the International Development Committee highlights the importance of tax collection in developing countries, and recommends that the UK’s aid programme should increase its focus on supporting tax authorities

This is equally valid for all forms of taxation, including VAT, personal income taxation and corporate taxation. It is also essential that taxes are paid on a fair and equal basis by local companies and individuals as well as foreign investors

The UK already does work in this area; for example, the Department for International Development (DFID) provided a very successful programme of support to the Rwandan Revenue Authority over a ten-year period. But the International Development Committee recommends that this sort of work should be given higher priority within the UK’s future aid programmes.

The Committee’s Chairman, Rt Hon Sir Malcolm Bruce said:

"The aim of development work is to enable developing countries to escape from over-reliance on aid.. Supporting revenue authorities is one of the best ways of doing this: it represents excellent value for money, both for the countries concerned and for UK taxpayers. That is why we are urging the Government to do more."

On a recent visit to Afghanistan the Committee was told by the Minister for Mines that UK advice and assistance had dramatically increased the revenue from the mining sector and this could increase many times over in the coming years.

The report also recommends that the Government should conduct an analysis of the impact of its new tax rules on developing countries as a matter of urgency.

The Controlled Foreign Companies (CFC) rules are designed to discourage UK-owned corporations from using tax havens. Traditionally these rules have applied to all UK-owned corporations – both those operating in the UK and those operating overseas. Under the new rules, however, this will apply only to corporations operating in the UK, making it easier for those operating in developing countries to use tax havens.

A number of NGOs have campaigned vigorously against the changes, with ActionAid estimating that developing countries may lose up to £4 billion in tax revenues as a result. The UK Government does not accept this estimate, but does not deny that there will be some cost to developing countries. The Committee recommends that the Government should conduct its own analysis, and – subject to the outcome – should consider reversing the change.

Rt Hon Sir Malcolm Bruce MP, Chair of the Committee, commented:

"The Government is committed to supporting economic growth in developing countries to reduce their dependency on aid. While this is clearly the right thing to do, it would be deeply unfortunate if the Government’s efforts were undermined by its own tax rules.

Some estimates claim that the revised CFC rules will cost developing countries up to £4 billion. We do not know if this estimate is correct, but the Government cannot legitimately refute the £4 billion figure unless it is prepared to conduct its own analysis. That is what we are urging it to do."

The Committee also received evidence which argued that the Government should require UK-owned companies to report their financial information on a country-by-country basis, rather than on an aggregate basis. The Government is reluctant to act unless other EU countries do likewise, but the Committee believes that it should act unilaterally. Doing so would help to expose tax evasion in developing countries.

Rt Hon Sir Malcolm Bruce added:

"The Government is rightly seeking to support the link between private sector growth and development. An important part of this is ensuring that the correct amount of tax is paid.

Country-by-country reporting would help to achieve this, and the cost to companies would be very modest. We took evidence on this from companies including Rio Tinto and Glencore: Rio Tinto is already reporting on a country-by-country basis voluntarily, and Glencore is also open to the idea."